Most business valuation assignments call for a conclusion of value. However, there may be times when a calculation of value can be a quicker, more cost-effective solution.
Value conclusions
When providing conclusions of value, valuators consider all approaches and procedures they deem appropriate for the circumstances. The valuation takes into account applicable valuation practices and standards, as well as any relevant legal precedents. The result may be presented as a single amount or a range of values.
This level of service generally produces a comprehensive, reliable estimate of how much a business is worth in today’s marketplace. When providing a conclusion of value, the valuator customarily issues a comprehensive written report. So value conclusions take significant time to complete, and they’re generally more expensive than calculations.
Value calculations
A calculation of value is usually more “bare bones” than a full-blown value conclusion. For a calculation of value, the expert generally applies only approaches and procedures the client explicitly agrees to in advance. The result is expressed as a calculated value that may be a single amount or a range of values.
With calculations of value, experts usually provide brief written reports that summarize their procedures and findings — or they may not provide any written reports, instead reporting the results verbally.
If a written report accompanies a calculation, it typically includes a disclaimer stating that the result could have been different if a full valuation had been performed. Beware: When calculations are presented in a litigation setting, this admission may raise a red flag to opposing counsel and discredit the expert’s opinion or the limited scope of the report in the eyes of the court.
Selecting the right type of engagement
The professional standards of valuation organizations, such as the American Institute of Certified Public Accountants, the National Association of Certified Valuation Analysts and the American Society of Appraisers, recognize both levels of service.
The appropriate service level depends on the circumstances. For example, a calculation could be appropriate when negotiating the sale of a business or settling a lawsuit. It also may be appropriate for initial estate and tax planning.
On the other hand, a comprehensive value conclusion is often required for IRS issues, such as estate and gift tax filings, as well as in certain other situations, such as valuations prepared for Small Business Administration programs. Valuation conclusions are also generally advisable when litigation is involved because courts tend to find them more credible than calculations.
However, courts may sometimes admit a calculation of value into evidence. For instance, in a recent divorce case — Mikalacki v. Rubezic (No. 1 CA-CV 21-0483 FC, Court of Appeals of Arizona, October 18, 2022) — the appellate court upheld the use of a calculation by the trial court to value the couple’s law firm. The calculation of value was presented by the wife’s expert, and the husband didn’t offer an alternative expert opinion.
While the appellate court admitted that a calculation is “short of the gold standard, a fact-finder need not discount an expert’s opinion solely because the expert ‘did not consider every single process and procedure that would be included’ had he conducted a fuller valuation.” If the husband had hired a valuation pro to provide a full-blown value conclusion, the outcome of the case might have differed.
Get it right
In business valuation, one service level doesn’t necessarily fit all situations. Contact us to determine what’s appropriate for yours, based on the intended uses of the valuation, access to the company’s financial records, and time and resource constraints.